SVB and the concentration risk inside startup cash
The bank's closure exposed how payroll, reserves and payment operations can depend on a single institution, even after a successful financing round.
California's banking regulator closed Silicon Valley Bank on Friday, 10 March 2023, and appointed the FDIC as receiver. A financial institution closely connected to technology and life sciences had failed. For companies that held their operating money there, the immediate problem was the availability of funds for payroll and suppliers. Money shown on a balance sheet was not necessarily money that could be moved that afternoon.
The eventual protection of all depositors can obscure the uncertainty of that weekend. The initial FDIC announcement distinguished insured from uninsured deposits. A broader decision on Sunday promised all depositors access to their money on Monday. Until that announcement, companies could not count on the outcome. The episode exposed both bank risk and the practical dependence of businesses on uninterrupted payment access.
What changed over the weekend
The FDIC initially said insured depositors would have access to their insured funds no later than Monday. Its plan for uninsured depositors involved an advance dividend and a receivership certificate for the balance. The amount and timing of further recovery depended on the receivership, leaving companies uncertain about how much of their operating balances they could use.
- 10 March 2023
Bank closed
The FDIC became receiver. Its initial announcement distinguished insured access from the recovery process for uninsured deposits.
- 12 March 2023
All depositors protected
US authorities announced that all SVB depositors would have access to their money from Monday.
- 13 March 2023
Access date
The date promised in the joint statement for access to all depositor funds.
The broader depositor protection was announced after the closure, rather than as part of Friday's initial notice.
The joint Treasury, Federal Reserve and FDIC statement that followed announced action to protect all SVB depositors. Shareholders and certain unsecured debtholders would not be protected, and losses associated with supporting uninsured deposits would be recovered through a special assessment on banks. The decision covered SVB's resolution without creating a permanent guarantee of every uninsured deposit at every bank.
The later review identified a vulnerable combination
The Federal Reserve's subsequent review described a bank serving predominantly technology and life sciences companies, with deposits that were largely uninsured and assets invested primarily in longer term securities. It found that rising interest rates had increased unrealised securities losses while deposit outflows placed pressure on liquidity.
The review reported that SVB lost more than $40 billion in deposits on 9 March. It identified failures to manage interest rate and liquidity risk, alongside weaknesses in supervision. For startup boards, the relevant concentration extended beyond a bank's name: customers exposed to similar financing conditions could need their deposits at similar times. A familiar institution and a specialised customer network were not substitutes for an assessment of financial resilience.
Insurance and diversification answered different questions
The FDIC's standard insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. Deposits in the same category at the same bank are aggregated. Opening several business accounts at one institution does not by itself multiply coverage. A company also needs to identify the actual bank behind a financial platform or cash management arrangement, rather than rely on the number of interfaces it uses.
Insurance addresses potential loss within the applicable rules. Diversification can also reduce dependence on a single institution for immediate operations. These are related but distinct objectives. A company can spread balances yet still route all payroll through one account, with no alternative payment process ready. An effective policy examines both the legal location of money and the practical route by which it reaches employees and suppliers.
A second bank needed to be ready to work
Opening an account is only the beginning of operational readiness. Authorised signatories need access, payment limits need to be suitable, and the finance team needs to understand cutoffs and approval requirements. A backup account with no usable credentials or insufficient transaction limits offers little help when an urgent payment is due. The relevant evidence is a tested ability to transfer and disburse funds.
The amount kept readily accessible should follow actual obligations. Payroll dates, taxes, supplier deposits and recurring bills have different timing. Mapping them makes it possible to distinguish immediate operating cash from reserves that can tolerate a longer settlement period. This approach also avoids treating every treasury instrument as interchangeable merely because each is described as cash or a cash equivalent in a management report.
Treasury governance belonged alongside the financing plan
A successful fundraise can sharply increase a company's balance with its principal bank. Treasury arrangements need to be reviewed at that point, rather than remain those of a much smaller business. The board can set counterparty limits, define permitted instruments and delegate authority for moving funds. The finance team then needs a current record of balances, institutions, access arrangements and near term obligations.
SVB's failure showed why this work matters even for companies with substantial runway. The risk was not confined to exhausting cash through normal operations. A disruption at a financial intermediary could interrupt the ability to use cash already raised. Treasury therefore deserved an operating plan with named responsibilities and usable alternatives, proportionate to the amount of money and the commitments it supported.
Investment implications
- Protection of all depositors was announced after the closure; it was not part of the initial resolution plan.
- A treasury policy needs to address access to operating funds as well as the risk of loss.
- Multiple accounts or interfaces do not necessarily mean exposure to different banks.
Sources
- FDIC creates a Deposit Insurance National Bank to protect insured depositors of Silicon Valley Bank (opens in a new tab)
FDIC
- Joint statement by the Treasury, Federal Reserve and FDIC (opens in a new tab)
Federal Reserve
- Review of the Federal Reserve's supervision and regulation of Silicon Valley Bank: Executive summary (opens in a new tab)
Federal Reserve
- Understanding deposit insurance (opens in a new tab)
FDIC
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